How do you build a retirement budget when your future income and expenses are uncertain? It’s the question plaguing many a boomer nearing retirement age.
Despite the best laid plans, retirement income can remain largely outside of ones control—subject to current rates of return on savings and investments, social security, and taxes—not to mention inflation working against you.
With income so indefinite, the best way for retirees to maintain control is to stay grounded in expenses. To enjoy a good quality of life throughout their golden years and ensure ability meet necessary financial obligations, retirees and soon-to-be retirees should focus on budgeting properly and avoiding the all too common trap of spending too much too soon.
Look at the past
To build a budget for a projected future, retirees can start by looking at past expenses and note which will costs are likely to remain fixed, and which may increase or decrease over time. For instance, some retirees may no longer have housing costs, freeing up a significant portion of their budget, but other related costs like property taxes and utilities will remain, and still other costs, like healthcare, are likely to increase.
Retirees should consider the total annual cost of all necessary expenses from food and transit to insurance premiums and vehicle registrations before moving onto the nonessentials like golf, vacation, and other golden year favorites.
Calculate by a percentage of your retirement savings
Prior to factoring in the fun stuff, retirees should also take a look at retirement savings to anticipate likely retirement income. While nothing is set in stone, there are a host of resources- from financial planners to online retirement calculators- to help calculate projected earnings.
A common rule of thumb is to expect to spend roughly 85 percent of after-tax working income in retirement. The 85 percent income replacement rate however, is just a starting point- each individual’s circumstances and previous planning could cause the replacement percentage to be significantly higher or lower.
After making an informed assessment of probable retirement income, retirees should subtract their required expenses, calculated above, to see what remains for the rest. The rest being everything from non essential bills- like memberships and subscriptions, to dependent expenses- be they children or parents, to fun stuff- like travel, hobbies, and entertainment.
Outcome not adding up?
That’s a lot to squeeze in on a limited retirement budget. If the numbers aren’t adding up, retirees might consider finding ways to lower their fixed expenses to free up more cash for flexible, discretionary expenses. The best way to approach an overloaded budget is to take a step back and prioritize the things of most value. If there isn’t enough room for a visit to see the grandkids and admission to the annual golf outing- there’ll have to be some picking and choosing and/or trade offs elsewhere.
One approach that’s become increasingly popular as lifespans continue to increase and subsequent retirement expenses rise, is a working retirement. Not only does a working retirement mean additional income and more stability, it also means enjoying benefits usually offered by employers like group health insurance and flexible spending accounts.
The bottom line
The options are varied and choices will differ from person to person. The most important thing about budgeting during retirement is setting up a sustainable lifestyle. Whether that means tapping into well funded savings to enjoy bucket list adventures or living simply at home and spending more time with family. Just like any other life stage, it’s all about priorities and trade-offs. Just be sure to plan within the parameters of your new monetary realities.